International Trade Issues and Challenges

International Trade Issues and Challenges

Sam Choon Yin (August 2004)[i]

 

Why do nations trade? Does trade provides the promised benefits? Are the gains from trade fairly distributed? These are some of the commonly asked questions regarding trade and globalisation. With advancements in technology and generally declining trade restrictions around the world, growth in trading activities has surpassed growth in world output. But some countries, particularly the less developed countries, have voiced their concerns about unfair distribution from trade gains. For example, representatives of the developing countries claimed that governments in developed countries were still paying huge subsidies to their farmers. The trade distortions were harmful to poorer farmers in the developing countries. It is important to recognize that the developing countries are not denying that trade is beneficial to themselves and the rests of the world. But they want the game to be more fairly played among the nations.

 

Globalisation and trade have helped to lift around 700 million people out of poverty in the 1990s. Global population living in extreme poverty has fallen to 20 percent (1.2 billion people) in 1998 from 25 percent in 1990. In China, after two decades of opening up, 200 million people were lifted out of poverty between 1978 and 1995. In Singapore, the general sentiment among politicians is that trade is good for all countries particularly for smaller countries like Singapore. In a recent writing, Singapore’s Ambassador at-large Professor Tommy Koh said:

 

‘Can you imagine a world governed not by globalisation but by autarchy? In a world governed by autarchy, borders are impenetrable and countries are protective of their trade, their human talent, their technology. In an autarchic world, Singapore has no future because our domestic market is only four million people. In a globalised world, the world is our market and therefore although we are a very small country, we are in the WTO (World Trade Organisation) table of leading exporters and importers – ranked among the top 20 importing and exporting countries’ (Koh, 2003, p. 126).

 

Singapore essentially grew as a trading port. Sir Stamford Raffles chose Singapore in 1819 for trading purpose due to its strategic location and deep harbour. The British had wanted to make use of ports in Singapore, together with Penang and Malacca in Malaya, to end Dutch monopoly on trade in Southeast Asia. While the Dutch focused on trade between Europe and East India, the British were more interested in free trade. To facilitate trade, financial institutions and commercial operations were installed in these trading ports thus helping Singapore to grow. The pace was accelerated when the People’s Action Party (PAP) took over in 1959.

 

Despite the general sentiment that trade is beneficial, many countries around the world are still imposing protective measures. The US for example, imposed tariffs of up to 30 percent on steel imports in early 2002 which were intended to last for three years (the move lifted after strong protests from Europe, Japan and the World Trade Organization). US, Europe and Japan were also accused of providing up to USD360-USD400 billion subsidies a year to their farmers thus making it difficult for poorer farmers in developing countries to sell their products to these large markets. The basic objective of these protectionist measures is to provide local producers an edge over foreign producers to sell more of their products both domestically and abroad. Exports are encouraged while limiting imports of similar goods. In a way, such measures resemble the mercantile views. The mercantile views reached their peak in popularity back in the 17th and 18th centuries in Europe. The mercantilists argued for special treatments (like provision of subsidies and monopolistic privileges) to groups and individuals favoured by the state to encourage more exports. Protections like tariffs were encouraged to limit competition from abroad. More exports and lesser imports allowed European countries to collect bullions in the form of silver and gold to strengthen their military powers.

 

The recent WTO accession negotiation between US and China included clauses that were very much based on the mercantile school. The clauses appeared to favour the US at the expense of the Chinese. For example, China was persuaded to lower its tariffs to an average of 17 percent and even lower to 14.5 percent for US priority products like pork and cheese. China was also persuaded to remove its subsidies to farmers. As part of the negotiation, US won a critical ‘war’ to restrict Chinese exports of textiles and clothing to US until the end of 2008 (four years after the Agreement on Textiles and Clothing expires). All these measures limit exports of Chinese products to US while allowing more US products to enter China.[ii]

 

The mercantilist school of thought was criticised for treating trade as a zero sum game. It is useful to note that merchants were the ones who formulated the ‘rules’ of the trading game and merchants were not necessarily economic theorists. The merchants wanted benefits for themselves but at the expense of the consumers who had more limited choices and paid higher prices. The society was worse off too. Many theorists (political economists) subsequently tried to debunk the mercantile ideas. I will briefly discuss some of the better-known international trade theories starting off with Adam Smith’s absolute advantage theory.

 

Adam Smith published ‘An Inquiry into the Wealth of Nations’ in 1776, which introduced the absolute advantage theory. It states that voluntary trade between two nations creates benefits to both nations. The theory implies that a nation should specialize in and export the good in which it has an absolute advantage and import the good which it has an absolute disadvantage. Consider Table 1 below. For simplicity, assume that only two nations (US and UK) and two goods (cotton and paper) are involved. The basis for deciding which nation has an absolute advantage in the goods lies on labour productivity. A nation has an absolute advantage in a good if the nation can produce more units of the good per labour as compared to the other country.

Table 1
Absolute Advantage Theory

 

United States

United Kingdom

Cotton (bales /man-hour)

10

5

Paper (rolls / man-hour)

7

9

 

Table 1 shows the production efficiency of the US and UK for cotton and paper. US can produce either 10 bales of cotton or 7 rolls of paper per man-hour, while UK can produce either 5 bales of cotton or 9 rolls of paper per man-hour. Clearly, US has the absolute advantage in cotton production while UK has the absolute advantage in paper production. Both countries should specialise and trade with their absolute advantage commodities to reap mutual benefits. Specialisation, according to Smith, generates significant growth in output volume. This is not surprising since with specialisation, the producers can develop expertise in the production of that good thus allowing them to minimize wastages and repetition of work. Generally, more could be produced with lesser inputs. Trading (or exchange) was promoted by Smith for specialization in the production of one good meant that the country would have lesser amount of the other good. To have a good balance of both goods, both nations should trade with one another. It is possible to show that with trade the total consumption of cotton and paper in both the US and UK increases. See Sam (2002) and Salvatore (2001).

 

Then came David Ricardo. David Ricardo introduced the comparative advantage theory in 1817. According to theory, commodity specialisation and production with trade benefited the participating nations. Each nation benefited by producing and exporting the commodity in which it has a comparative advantage. The nation should import the commodity in which it has a comparative disadvantage. The interesting thing about the theory was that it showed how trade could result in higher output and consumption among the trading nations even if a nation had absolute advantage in all goods. It is the relative labour productivity which matters. A nation should specialise and export the good which it is relatively more productive in producing that good, and leave the other good in the hands of the other nation.

Table 2

Comparative Advantage Theory

 

 

United States

United Kingdom

Cotton (bales /man-hour)

30

5

Paper (rolls / man-hour)

20

10

 

Table 2 shows that US has absolute advantage in the production of both goods. But in a relative sense, US is six times (30 / 5 = 6) more efficient that the UK in producing cotton but is 2 times (20 / 10 = 2) more efficient in producing paper. According to the comparative advantage theory thus, US should specialise in and export paper while UK should specialize in the production of cotton.

 

Ricardo’s simplified assumptions on the labour theory of value, being that labour is homogeneous and used in fixed proportion in the production of all commodities, are not realistic. In 1936, Gottfried Haberler extended the comparative theory with the opportunity cost theory.  The opportunity cost measures the amount of a good given up to yield enough resources to produce an additional unit of another commodity. A nation has the comparative advantage for a commodity if it sacrifices lesser quantity of another good to produce an additional unit of it.

 

Table 3

Comparative Advantage Theory: Opportunity Cost Approach

 

United States

1 cotton = 2 / 3 paper

United Kingdom

1 cotton =  2 paper

 

From Table 3 (using the same example as illuminated in Table 2 earlier), it can be easily seen that in the absence of trade, US must give up two-thirds of a unit of paper to produce 1 bale of cotton (1 cotton = 20/30 paper), while UK must give up 2 rolls of paper to produce 1 bale of cotton (1 cotton = 10/5 paper). US has a comparative advantage in producing cotton, due to its lower opportunity cost for producing cotton, while the UK has a comparative advantage in producing paper due to the lower opportunity cost of producing paper (the opportunity cost of producing 1 bale of cotton in UK is 0.5 rolls of paper as compared to 1.5 rolls of paper in the US). With specialization and trade, both nations gained. Both the US and UK enjoyed higher consumption of both goods. The opportunity cost approach is theoretically more superior.

 

The next important international trade theory is popularly known as the Heckscher-Ohlin Theory (H-O theory). The previous trade theories use the relative commodity prices to derive comparative advantage for mutual beneficial trade. The H-O theory or the factor endowment theory, derived by Eli Heckscher in 1919 and later expanded by Bertil Ohlin in 1933, proceeds to explain the causes for relative commodity prices and comparative advantage through recognising the difference in relative factor abundance and factor intensity. It is essentially a factor-based comparative advantage theory. The H-O theory builds on the comparative theory. It assumes that both trading nations have equal tastes and technological production capability. Products are assumed to be homogenous. No economies of scale are present and technologies are assumed to be identical everywhere. The theory predicts that a nation exports the good which utilises intensively the factor input that the nation has in greater abundance.

 

For simplicity, consider two nations; Nation 1 and Nation 2. Nation 1 is labour abundant while Nation 2 is capital abundant. Assume that there are two goods (X and Y). Further assume that good X is labour intensive while good Y is capital intensive. According to the H-O theory, Nation 1 has a comparative advantage in producing good X while Nation 2 has a comparative advantage in good Y. Nation 1 (2) should therefore specialize and export good X (Y) and import the good Y (X) from Nation 2 (1).  The reason is simple. With more labour, the labour cost in Nation 1 is relatively lower than that in Nations 2. Nation 1 is a better ‘candidate’ in producing good X. Since cost of capital is likely to be lower in Nation 2 (due to its abundant there), it is relatively cheaper to produce Good Y in Nation 2.

 

The H-O-theory could be used to explain some of the observed trade patterns. It predicts that countries like India and China, with their abundant labour, have comparative advantage in the production of clothing, paddy and textile. These products are relatively more labour intensive. China and India are more likely to specialize in and export them. Countries like the US and UK on the other hand have comparative advantages in capital-intensive goods. The governments can influence the kind of goods to specialize in accordance to the H-O theory. Examples include policies to reduce interest rates (to make capital goods relatively cheaper), keeping wages low and changes in tax policies. The objective is to affect the factor prices.

 

While the predictions of the H-O theory make economic sense, it has many assumptions which insufficiently explains today’s international pattern of trade. Some of these assumptions include no economies of scale, technologies being identical everywhere and products are undifferentiated. As Michael Porter noted, the H-O theory is useful primarily for explaining ‘broad tendencies in the pattern of trade (for example, its average labour or capital intensity) rather than whether a nation exports or imports in individual industries’ (Porter, 1990, p. 12). New trade theories emerged to fill the gap. I will briefly discuss the main ones.

 

Trade based on Economies of Scale

Increasing returns to scale facilitates mutually beneficial trade between two identical nations. Increasing returns to scale refers to the production situation where output grows proportionately more than the increase in inputs or factors of production. It occurs due to the possibility of a greater division of labour and specialisation as the scale of operation increases (Salvatore, 2001, p. 172). Comparative advantage is measured by the magnitude of the economies of scale reaped. The outcome of specialisation is higher total world output for both commodities. The strategy basically involves ‘being the first firm or nation to enter the industry’. The first mover advantage is substantial in allowing companies to reap huge economies of scale, which effectively deters other companies to compete with the incumbents. Coupled with learning by doing advantages, average costs of production can be further reduced as volume of production accumulates to enhance the incumbents’ competitiveness.

 

Trade based on Product Differentiation

Majority of the international trade activities involves the exchange of differentiated products. Intra-industry trade arises to take advantage of important economies of scale production (Salvatore, 2001, p 177). Product differentiation promotes specialisation and thus trade. Nations can benefit from reduced cost of production through specialisation in differentiated product and benefit from intra-trade. 

 

Trade based on Dynamic Technological Differences

Earlier, I have noted that companies can reap economies of scale for being the first to enter the industry. Which companies or nations in general will enter first to reap the advantages? Generally, those companies, which gain a lead in technology, have a better chance of enjoying the first mover advantage. They have the edged over others to introduce technologically superior products, specializing in them and export the goods to other countries. The comparative advantage falls as technology diffuses and the gap narrows. The transference of technology through trading of new high-technology products allows importing nation to improve technologically. Over time, this negatively affects the market share and comparative advantage of the ‘initial’ exporting nation.

 

In a bid to explain why the US was able to pioneer so many new products and export them, Raymond Vernon introduced the Product Life Cycle Model. It explains the changes in comparative advantage resulting from the transference of technology. The product undergoes the following five stages:

 

1)                  product introduction

2)                  expansion of production for export

3)                  standardisation and beginning of production through imitation

4)                  imitation country starts underselling the innovating country in third markets

5)                  imitation country starts underselling the innovating country in home markets.

 

From stages 1, 2 and 3, the innovating country has the comparative advantage. Presence of an early home demand stimulates firms there to introduce new products that are more superior to the existing ones. However the comparative advantage ends after stage 4. This occurs when the technology is completely transferred to the imitating country. The imitating country, its comparative advantage starts from stage 4, completely overtakes the innovating country at stage 5.

 

The model explains the emergence of numerous multinational companies around the world. As production costs become relatively higher in the home country, companies take advantage of lower labour and land costs in other countries to further expand their production capacity. This leads to more trade in taking place as these MNCs buy inputs and export their final products to other countries around the world.

 

The above discussion focuses on the gains from trade and the general patterns of trade as explained by international trade theories. The gains from trade are usually derived from higher output and consumption patterns in both the importing and exporting nations. Despite the advantages, governments impose protectionist measures to limit trade. There appears to be some contradiction going on here. While nations are very much interested to jump on the bandwagon to enhance trading opportunities either via international initiatives like the WTO or through bilateral free trade agreements, they are unwilling to let off measures that clearly restrict trade opportunities. The latter can be attributed to increasing pressure from interest groups like trade unions to provide industries certain protections against foreign competition. In the developing countries, protection measures are imposed to provide governments with the relevant tariff revenue to finance their expenditures. They are also afraid that their local producers might not be able to compete with more efficient foreign producers thus creating high unemployment rates in their nations. The problems can potentially compound to include political and social chaos. This possibly explains why a grace period of several years is given to developing countries to phase off their protections in WTO and FTA agreements. During the grace period, the governments are expected to introduce the necessary reforms to build up the local producers’ capability to compete. Institutions are expected to strengthen.

 

Trade unions’ interests should not be taken lightly. Trade unions represent the workers. They provide a collective bargaining power to improve workers’ working condition and raise their remunerations. Accordingly, the trade unions seek protection from the government if trade worsens the workers’ conditions. While the earlier discussion talked about possible higher output reaped from more trade taking place, the trade theories discussed so far failed to provide any implications of trade on income distribution. The factor price equalisation theorem came to the rescue. Extending the results from the H-O theory, Paul Samuelson proved that international trade could bring about equalisation in the relative and absolute returns to homogeneous factors across nations.  The theory is also known as H-O-S theorem. What the theory means is that with international trade all homogeneous labour (capital) with receive the same wages (capital gains) in all trading nations.

 

On the distribution of income within nations, the Stolper-Samuelson theorem predicts that the real income of labour and capital owners equalise with trade. In other words, nations with abundant workers will see that its workers’ income rise while the capital owners real income will fall as trade proceeds. The reason is simple. According to the H-O theorem, a labour abundant nation should specialize in and export labour intensive goods. As this occurs, the demand for labour increases (since more labour are required to support further production) thus pushing up the real wages of the workers in the nation. Conversely, the demand for capital falls thus reducing the real income for capital owners. Applying this theory to the developed countries explains why protectionist measures are difficult to remove. Consider the case of the US. Being relatively more capital abundant, the US has a comparative advantage in producing capital-intensive goods. As specialization and trade take place, the demand for capital rises thus raising the real income of capital owners. But what happens to the workers? They are generally worse off relative to the capital owners. The demand for workers falls with trade in the capital-intensive industry thus bringing down the workers’ real wages. Being representatives of the workers, trade unions respond to the workers’ sufferings by demanding more protections on the capital-intensive industries. This is seen in the steel industry where tariffs as high as 30 percent had been imposed on steel imports from other countries like Korea and Japan. It appears that the workers and unions’ demand for protection was so immensely powerful that the US President had to oblige to their demand for more protections despite welfare losses that usually accompany protections.

 

Trade distortions are also created when there is unfair competition among trading nations. This is the case for the agriculture industry. The US claimed that the developing countries have high tariffs on goods that US exports. This prevents the US from exporting its goods to many emerging countries thus potentially worsening its balance of trade. As Ann Veneman, Secretary of the US Department of Agriculture said in the September 2003 WTO Cancun Ministerial Meeting:

 

‘To gain access for our producers to these market opportunities, tariffs must be reduced. We argue that out markers are already relatively open. The global average agricultural tariff is 62 percent, while US Agricultural tariffs average only 12 percent. We simply want others to offer us the same competitive opportunity in their markets that we give them’.

 

She fails to recognize that the developing countries are not in the same footing as the US. They are emerging developing countries, not developed countries. Time is needed to allow them to phase out protectionist measures. She should know better since the US was once a developing country that needed several decades to phase out its protectionists measures. Every nation has undergone the state of being in the developing status, and in that stage, protections were deemed the normal thing to do to allow infant industries to grow and more foreign exchange earnings to collect.

 

Hernando de Soto also reminded us that the US was once a developing country more than 150 years ago (de Soto, 2001, p. 110). Protection measures were commonly adopted in the US back then. Chang Ha Joon writes that ‘it was only after the Second World War that the USA – with its industrial supremacy unchallenged – finally liberalized its trade and started championing the cause of free trade’ (Chang, 2002, pp. 29). The average tariff rates on manufactured products read more than 40 percent in the US and UK in 1820. Up to 1931, the average tariff rates in US still read more than 35 percent (Chang, 2002, Table 2.1, p. 17).

 

The other point to note is that ‘protections’ can be more than merely tariffs imposition. It is well known that the developed countries have also provided subsidies to their farmers, which represent another form of trade distortion that Veneman was illuminating. As much as USD360-USD400 billion was spent per year in the form of subsidies given to farmers in the OECD countries. While these subsidies accounted for only 2-3 percent of US’s GDP, it should be recognized that they accounted for more than 50 percent of India’s GDP. As a result of the subsidies, farmers in US could export their farm products much lower than the cost of production (Table 4). Such developments worried representatives from the developing countries.

 

Table 4

Cost of production and export price (US: 2001)

 

Item

Cost of production (USD/bushel)

Export price (USD/bushel)

Wheat

Soya bean

Maize

Cotton

Rice

6.24

6.96

3.47

0.93

18.66

3.50

4.93

2.28

0.39

14.55

Source: extracted from http://www.cpiml.org/liberation/year%202003/May2003/WTO.htm

 

In a related problem, the developing countries were worried about ‘dumping’ from the developed countries. Excess agricultural goods from the developed countries were sold below costs of production in developing countries. This was possibly a result of excess production in the developed countries. Provision of subsidies to farmers in rich nations magnified the problem. Dumping undermined the ability of local producers (in the less developed countries) to compete. As shown in Table 5, dumping has actually increased over the years despite WTO’s promised to end such practices.

 

Table 5

Dumping of agricultural products

 

Item

Dumping in 1995 (%)

Dumping in 2001 (%)

Wheat

Soya bean

Maize

Cotton

23

9

11

17

44

29

33

57

Source: extracted from http://www.cpiml.org/liberation/year%202003/May2003/WTO.htm

 

Problems such as these lead to failures in trade talks like the recent one in Cancun, Mexico (September 2003). Representative from the developing countries wanted their voices to be heard. They demand the removal of agricultural subsidies in developed countries. Interestingly, the WTO appears to know about this and publicly claimed that it is doing something about it (Moore, 2003, pp. 169-172). The failure in Cancun clearly dampened the WTO’s effort to raise its credibility. The US was prepared to oblige to lower its subsidies but only if the European countries and other developed countries do likewise. As Ann Veneman said, ‘We are prepared to shoulder our share of the responsibility. We have led the way with ambitious proposals addressing not only market access but also export subsidies and domestic supports. We are willing to make out farm programs less trade distorting, but only when the European Union and other countries reduce their supports to more commensurate levels’. The failed discussion in Cancun was a reversal of success in Doha (Qatar) which set the development agenda for discussion. The agenda was supposed to incorporate views from the developing nations. The chance of reviving the agenda was deemed to be low as least in the short-term. Jeffrey Schott, a senior fellow at the Institute of International Economics made this comment in The Economist:

 

‘The window for reviving the Doha round of negotiations is small. By spring 2004, the major trading powers will be busy with pressing domestic matters. The 2004 presidential election in America will colour trade politics; protectionist rhetoric already pervades the halls of Congress. Enlargement of the European Union (EU) will further complicate its decision-making process, especially on agriculture reform. If WTO talks are not resumed by then, they are likely to drift rudderless until well after the new America administration and EU Commission take office in 2005’ (Schott, 2003, p. 65).

 

Besides the need to have a fairer game in trade, it is important for nations participating in trade to be able to reap the benefits that trade brings. The nations must be ready with the necessary soft and hard skills to face any challenges. Generally, trade liberalisation efforts must be carried out in the right sequence and pace in manners that are suited to the respective nations. Only the countries themselves are able to determine whether they are ready or not. They should refrain from adopting the views of international advisers wholesale. They must dictate their own fate. What are the issues to look for to decide whether the nations are fully ready or not? I will briefly illuminate the main ones.

 

First, providing farmers and industrialists with properly defined property rights is essential. With property rights properly defined and enforced, farmers and industrialists can use them as collaterals to obtain the necessary loans to support production. The credits allow them to acquire the inputs to produce and sell them domestically and internationally to generate returns in access of the principal loans borrowed plus interests. The incentives to do better will accompany the change. Generally, things will be done in a more effective and efficient manner to reap higher returns than before. ‘Poorly defined property rights’ is the ‘mystery of capital’ which de Soto popularises in his book. In it, he writes:

 

‘Because the rights of these possessions (houses and land in poor countries) are not adequately documented, these assets cannot readily be turned into capital, cannot be traded outside of narrow local circles where people know and trust each other, cannot be used as collateral for a loan and cannot be used as a share against an investment’ (de Soto, 2001, p. 6).

 

Loans can also be provided through micro finance or micro credit. Here, small amount of loans are provided to the poorer people to help them to purchase the necessary inputs. With these inputs, production can begin and outputs can be sold to generate revenue. The argument in favour of this approach (to lift people out of poverty) is that some people remain poor not because they are lazy or stupid, but rather because they do not have the necessary capital to begin production. Funds allocated to them are usually accompanied with skills provided to them so that the funds can be more productively utilized. The debtors are often given the freedom to utilize the funds in any manner they want. Successful stories of micro credit facilities are plenty. Some of the more common ones include Grameen Bank in Bangladesh (founded by Muhammad Yunus), Overseas Private Investment Corporation (which sponsor foreign direct investments in developing countries) and Indian Bank to Self Help Groups in Madurai district of Tamil Nadu (India). These initiatives are particularly useful to those poorer farmers and industrialists who are shunned from participating in the financial system due to lack of properties (to be used as collaterals) and low numeric skills and literacy.

 

The other hindrance to reap the benefits of trade is corruption. It is perhaps not wrong to say that corruption problems exist in all nations. Only the magnitude of severity differs among countries. Singapore is often touted by international rating agencies as one of the least corrupt nations in the world. But the problem does exists here albeit irregularly. Corruption can be referred to as acts of bribery and distortions which essentially offer some individuals benefits at the expense of the society.

 

It is generally difficult to do business with countries with rampant corruption. Informal discussions need to be carried out. They are unproductive. The time spent can be more productively used elsewhere. Higher costs are incurred. Money and other benefits-in-kind have to be offered to the bribers. Social problems can be promoted (for instance, offering sexual services to public officers is one way to bribe them). But still, there are businesses which are willing to undergo these processes. It appears that the benefits of trading with these countries outweigh the costs incurred. The argument here though is that more trading can actually take place if the corruption problems are eradicated. Moreover, the gains from trade are likely to be more fairly distributed between and within nations if more arms length based trades were carried out. They will effectively lead to more positive economic and social outcomes.

 

There have been many suggestions to eradicate the corruption problems. Some of the common ones include raising the probability of catching the culprits, raising the penalty costs, increase the salaries paid to government officials, lessen contacts between businessmen and government officials, increase transparency on regulations and give more power to anti-corruption agencies. The objective of these measures basically is to increase the costs and reducing the benefits for government officials to participate in acts of corruption. Raising the standards of corporate governance also helps. Managers must be aware that offering bribes is not the right thing to do. Pressures can be exerted to governments that they would not be reaping the benefits from trade if corruption problems were not eradicated. On this note, one should be pleased with the public announcement that solving the corruption problems in Malaysia will take priority in the new administration under Prime Minister Datuk Seri Abdullah Badawi.

 

To facilitate trade between nations, red tapes must be cut. Trade facilitation is one of the ‘Singapore issues’ (named so because the issues were first raised in Singapore back in 1996 in WTO’s first ministerial meeting) which has not to be resolved (the others include investment, competition policy and transparency in government procurement). It may be useful to quote the writings of Mike Moore, former General Secretary of the WTO, who wrote in a recently published book:

 

‘Successive GATT rounds significantly reduced traditional trade barriers, but serious practical obstacles in international trade remain. Traders from both the developed and the developing world have repeatedly pointed to the significant red tape that still exists in moving goods across borders. Documentation requirements frequently lack transparency, they are vastly duplicated and vary between countries….. Differing product standards, restrictive and non-transparent administrative regulations and border delays accounting for up to 20 percent of the overall transport time hamper the integration into the global economy and threaten to undo some of the benefits of recent liberalization efforts… Recent studies indicate that the overall deadweight welfare loss caused by those inefficiencies amounts to USD70 billion’ (Moore, 2003, p. 159).

 

Obviously, cutting red tapes can help to reduce the corruption problems that many countries face. Trade among nations would then more smoothly carried out. It is a huge task that needs to be addressed urgently.

 

Kishore Mahbubani noted that Asia and many other poor countries around the world had lost a whole millennium (20th century). In the pre-16th century, Arab, China and India actually dominated but failed to keep pace with advancements in the west. Since the 16th century, Europe and US had leapt ahead. Spain, Holland, France, US and Britain were the major colonizers. They occupied territories in the east to acquire the rich raw materials. Even Portugal, a small state with only a few million people, had occupied territories in Goa (India), Macau (China) and Malacca (Malaya). In 1842, giant China lost Hong Kong to the British as part of the price of defeat in the Opium War. British eventually won the commercial and trading rights with China. Throughout the 20th century, only Japan was managed to catch up with the west. What went wrong? Failures in the past like those mentioned above prompted Kishore Mahbubani to argue that Asian could not think (Mahbubani, 2002).

 

Generally, the developing countries cannot afford to ignore globalisation and trading forces that are sweeping the nations across. But trade liberalization efforts must be paced and sequenced carefully. The countries should not be pressured to remove their protectionist measures. They must resist the temptation to open freely early. While there are economic gains with total openness, social problems are likely to outweigh the benefits. Liberalizing too hastily may raise inequality, unemployment rates and corruption problems.

 

But this does not mean that the protections should not be removed at all. They should be removed in phases which must be determined by good leaders, not foreign ‘advisers’. Generally, subjecting the local producers to more competition benefits the society. Employment creation can be substantial with more trade. Consumers are better off with more choices and lower prices.

 

Liberalization must be more forthcoming only after the institutional framework is well in place. International relations with other countries must also be well established to see that genuine cooperation is present. Good governance matters very significantly to see that the reform processes are carried out effectively.

 

References

1.                  Chang, Ha Joon (2002) Kicking Away the Ladder: Development Strategy in Historical Perspective. Anthem Press (London).

2.                  De Soto, Hernando (2001) The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. A Black Swan Book (Great Britain).

3.                  Koh, Tommy (2003) ‘2003: An Optimist’s View of the Year Ahead’, in Yap, Mui Teng (editor) Singapore Perspectives 2003. Eastern Universities Press (Singapore).

4.                  Mahbubani, Kishore (2002) Can Asians Think? Second edition. Times Book International (Malaysia).

5.                  Moore, Mike (2003) A World Without Walls: Freedom, Development, Free Trade and Global Governance. Cambridge University Press (Great Britain).

6.                  Panitchpakdi, Supachai and Clifford, Mark (2002) China and the WTO: Changing World, Changing World Trade. John Wiley & Sons (Asia) Pte Ltd (Great Britain).

7.                  Porter, Michael (1990) The Competitive Advantage of Nations. The Free Press (United States).

8.                  Salvatore, Dominick (2001) International Economics. Seventh edition. Jon Wiley & Sons (United States).

9.                  Sam, Choon Yin (2002) Elements of Economic Environment. (Unpublished).

10.              Schott, Jeffrey (2003) ‘Unlocking the Benefits of World Trade’, The Economist, 1 November 2003.



[i] This is a shorter version of a paper originally written in November 2003.

[ii] A good discussion on China and the WTO can be found in Panitchpakdi and Clifford (2002).